Catcher North Sea failure hits AIM oil stock sentiment

AIM oil stocks have been taking a beating this morning after Nautical Petreoleum (NPE) and Encore Oil (EO) announced a poor result from their Catcher North Sea field (majority owned by Premier Oil). Encore is currently down 17% and Nautical is down14.5% on the news that the well had encountered gas rather than oil with a poor reservoir quality making it borderline economic. Nautical and Encore both own 15% of the Catcher field.

The bad news in the North Sea was accompanied by a disappointing update fromNighthawk Energy (HAWK) ( a previous holding from 2010 which was fortunately dumped early on as poor data began to be announced) from their Jolly Ranch project in the U.S.where oil recovery had been weaker than expected due to maintenance and well optimisation work. HAWK is currently down 8% today.

So my holdings in Bowleven, Xcite and Rockhopper are all suffering as a result of this negative sentiment. The difference with all these holdings is that they have substantial proven resources, and with the exception of Rockhopper, are derisked (though it still has £200 million in the bank for further appraisal wells and proven reserves of 200 million barrels at Sea Lion). Xcite encountered a larger than expected oil column and top end flow rates in December and reserves are likely to be confirmed of 160-250 mm barrels when the full CPR is published in late February or early March. As they say, there are AIM stocks, and there are AIM stocks!! - not for Widows and Orphans.

Prediction for FTSE 100 and DOW Industrials 2011

Contrarian Investor UK predicts the FTSE 100 will end 2011 at 6550 and the Dow Jones Industrials will hit 13,000.

But I believe its going to be a very volatile year, suiting a trading style rather than buy and hold. On the plus side, continued ultra low interest rates and quantitative easing will continue to drive the U.S. earnings and hence the market in 2011. It is unlikely that the Federal Reserve will begin to tighten monetary policy by raising interest rates too aggressively during 2011 despite signs of rising inflation notably in commodities. One day the U.S. government may be forced to take action against its ballooning budget deficit and rising national debt, but this isn't on the agenda in 2011 or even 2012 with the next presidential election due in 2012. Although the U.K. government has decided to take action to reduce spending and raise taxes, across the Atlantic this is an alien concept for now given this strategy would be likely to be politically unpopular with mainstream America.

The weak U.S. dollar has helped drive impressive growth in gold, silver, oil, and industrial metals as well as agricultural products e.g. cotton during 2010. It is unlikely that the dollar will reverse its trend in 2011 but continued high demand from Asia (notably China) may begin to wain.

There is likely to be notable sell-offs during 2011 precipitated by several possible scenarios:
1. worries about euro zone debt (particularly Portugal and Spain). The U.S. budget deficit and lack of action to tackle it.
2. Chinese inflation and an increase in interest rates
3. A stagnant or declining property market, plus rising defaults
4. Poor unemployment numbers in the euro zone and U.S.

Therefore I will not be over committing myself too early in 2011. I will keep cash on the sidelines to take advantage of falls in the more speculative stocks on my watch list rather than piling in during January when sentiment is too positive. I would rather buy on a sell-off then when the market is red-hot and universally bullish. These are:

1. Xcite Energy (XEL) - North Sea oil (already hold)
2. Bowleven (BLVN)  - Cameroon oil explorer
2. Nautical Petroleum (NPE) - North Sea oil
3. Coal of Africa (CZA) - South African coal miner
4. Angel Mining (ANGM) - Greenland Gold and Zinc (already hold)
5. Ithaca Energy (IAE) - North Sea oil

In addition to these AIM plays, I am also interested in Aviva, Shell, Reynolds, BAT, Imperial Tobacco as dividend stocks.